Embedding ESG considerations into the organizational strategy involves not only the adaptation of internal processes but also the reorientation of the corporate culture and development of governance structures that prioritize accountability and sustainable growth.
Urgent action needed
With mandatory climate reporting on the horizon, companies that embrace this practice will be able to demonstrate their commitment to sustainability, instill confidence in stakeholders and gain a competitive edge for long-term success. Boards should consider several key actions.
Seek greater alignment with financial reporting
As IFRS S1 and IFRS S2 come into effect, boards must take decisive action so that there is greater alignment with financial reporting, given the intrinsic link between sustainability and financial performance. The 2023 EY Global Climate Risk Barometer report indicates that only 26% of companies include the quantitative impacts of climate-related risks in their financial statements. This suggests gaps between climate strategy, risk management and corporate reporting.
To meet IFRS S1 and IFRS S2, boards must enhance their oversight of how ESG matters are identified, measured and reported in financial terms. They need to evaluate which ESG issues are financially material (i.e., likely to influence the economic decisions of users of financial reports) and see to it that these are adequately reflected in the company’s financial statements and disclosures.
A crucial aspect of the new standards is the emphasis on aligning the reporting boundaries for financial and sustainability reporting. This means that boards must require ESG information to be consistently and coherently reflected alongside traditional financial metrics.
To bridge this gap, appointing a chief sustainability officer (CSO) can be a strategic move. The CSO can act as the pivotal link, connecting sustainability initiatives with financial results by translating nonfinancial data into insights that meet the rigor of financial reporting standards. Enlisting sustainability professionals with expertise in ISSB standards can also assist in performing gap analyses, including data collection, procedural execution, control mechanisms and reporting frameworks, to fully comply with the new standards.
Place greater emphasis on data quality
Enhancing data quality is imperative for companies striving to improve decision-making, especially in managing climate-related risks and embracing sustainability opportunities. Accurate and granular environmental data empower companies with the insights necessary to evaluate their carbon footprint comprehensively and understand the broader environmental impact within their supply chains.
Companies can implement several key controls and processes for ESG data management. Establishing standardized procedures for data collection, validation and storage is fundamental. This helps maintain consistent and reliable data across different business units and geographical locations, enabling a holistic view of the company’s environmental performance.
Adopting automated data collection systems will also help streamline performance tracking and reduce manual errors, enabling the consistent, real-time capture of relevant data. Subsequently, setting clear environmental targets and establishing well-defined monitoring metrics would provide a framework for measuring progress against these goals.
The role of assurance is key to this. External verification and assurance of ESG data would help boost stakeholders’ confidence in the company’s climate reporting. By overseeing the implementation of these robust controls, boards can foster a regime where climate reporting is not only methodical and reliable but also transparent and accountable.
Drive the decarbonization strategy across the organization
Globally, net-zero pledges now cover 88% of global greenhouse gas (GHG) emissions and 92% of global gross domestic product at purchasing power parity per capita.1 For companies with institutional investors, the drive to achieve net zero is becoming increasingly non-negotiable as investors actively seek to align their portfolios with the transition to a low-carbon economy.
Boards should consider developing comprehensive decarbonization strategies that align with global standards and national commitments to reduce GHG emissions. These should clearly articulate decarbonization targets aligned with scientific pathways, such as those outlined in the Paris Agreement. With the enhanced climate-related and GHG emissions disclosure requirements, companies have an increased responsibility to integrate these targets into their overall strategy with clear accountability frameworks and timelines.
Boards would also need to prioritize the setting of science-based targets for emissions reduction, invest in sustainable solutions and regularly communicate progress toward achieving net zero to help maintain investor confidence and support.
The integration of these methods forms a solid foundation that supports a transparent and reliable ESG reporting process. It positions companies to comply effectively with emerging frameworks like IFRS S1 and IFRS S2 and addresses the demands of institutional investors for sustainable investment considerations.
Ultimately, high-quality ESG data is not just about meeting reporting requirements. It is also about equipping the board and management with actionable insights needed to transition to lower-carbon operations and align with a path to net zero, reinforcing their commitment to long-term value creation.
This article was first published in the Q3 2024 issue of the SID Directors Bulletin by the Singapore Institute of Directors.
